Economists warn higher inflation rates will inevitably lead to further interest rate hikes by the South African Reserve Bank (SARB) as South Africans remain under pressure from multiple load shedding and a massive electricity price hike in April.
In response to the ongoing power crisis in South Africa and last week’s (Jan. 12) decision by energy regulator Nersa to allow Eskom to increase electricity prices by 18.65% from April 1, 2023, a number of comments from economists and analysts were released on Monday (Jan. 16).
The overarching message of the responses is that the electricity price hike will undoubtedly drive up costs for the country’s households and businesses, leading to inflationary pressures in an environment of already elevated prices.
The Bureau of Economic Research (BER) also released its Fourth Quarter 2022 Inflation Expectations Survey, which reinforces this message.
The IES is a quarterly survey measuring inflation expectations and other inflation-related macroeconomic variables among four social groups-namely, analysts, business people, labour union leaders, and households.
According to the latest results, inflation expectations were raised in most sectors, with only analysts maintaining their views from the previous quarter, although these were already at a high level.
Average five-year inflation expectations rose slightly from 5.4% in the third quarter to 5.5% in the fourth quarter. This was due to business people, who revised their expectations upward from 5.6% to 6.1%.
After falling from 6.5% to 5.8% in the third quarter, household inflation expectations rose again to 6.3% in the fourth quarter. Average household inflation expectations for the next five years remained unchanged at 8.4% in the fourth quarter.
Looking beyond 2022, the three social groups have differing views on economic growth; analysts expect the economy to continue to lose momentum, with growth falling to just 1.1% by 2023, while the other two groups expect growth to remain relatively close to their 2022 forecasts. On average, growth is expected to slow slightly to 2.0% in 2023.
The results of the inflation expectations survey are significant in that they are one of many factors that the Monetary Policy Committee (MPC) of the SARB considers when it decides on the interest rate.
The MPC will be concerned if inflation expectations increase, especially if inflation expectations are significantly above the midpoint of the inflation target range of 3% to 6% or other inflation indicators deteriorate.
Rising inflation expectations may, for example, lead to higher wage demands as workers feel they need to be compensated for the expected rise. The BER noted that if demand is robust enough, some businesses may adjust their prices increases further upwards.
To prevent higher expectations from becoming a reality, the SARB may be forced to increase the interest rate.
According to Investec chief economist Annabel Bishop, this narrative is likely feeding through in South Africa. She noted that while CPI inflation is expected to fall to 7.2% y/y in December’s numbers out on Wednesday (18 January), the SARB is likely to keep hiking rates to bring it under control.
“With South Africa’s CPI inflation still well above the target and risks to the outlook, the SARB is likely to hike the repo rate again this month, but by 50bp. Inflation is proving slow to subside in South Africa, but this should accelerate in the first half of the year on base effects,” she said.
Regarding electricity price increases, Bishop said Stats SA normally tracks annual electricity price increases for CPI inflation in July.
As long as fuel prices don’t escalate this month – or another shock hits the economy – CPI should fall to about 4.3% in July as the country recovers from high fuel and food prices, the economist said.
“In the second half of 2023, if not by mid-2023, however, there is a risk that fuel prices will rise as China’s economy rebounds, while a much smaller slowdown in economic activity than expected this year would also put additional downward pressure on prices,” Bishop said.
“The higher interest rates that South Africa has already experienced will have a particularly negative impact on over-indebted consumers in the first quarter of the year. Risks to the outlook also include a weak domestic growth rate as strong load shedding continues this year, and a further deterioration in investor sentiment.”
A survey of economists conducted by Bloomberg found that there is a 45% chance that South Africa will enter a recession this year, due to load shedding and the ongoing power crisis.
According to the Bloomberg survey, the economy is unlikely to grow by more than 0.3% quarter-on-quarter until 2023. Economists expect GDP growth to slow from 2.3% in 2022 to 1.2% this year.
According to BER, South Africa’s power crisis is unlikely to ease in the short term, and load shedding remains the biggest downside risk and drag on South Africa’s growth prospects, the group said.